Consider the supply and demand for cell phones. The market demand for cars is gi
ID: 1189300 • Letter: C
Question
Consider the supply and demand for cell phones. The market demand for cars is given by Q_D = 7000-30P and supply is given by Q_S = 1000
a) Find the equilibrium price and quantity.
Suppose that consumers change their expectations and believe their future income will be lower. This causes the demand curve to shift to Q_D=6500-30P
b) If prices are sticky, does this shock lead to a surplus or a shortage? By how much?
c) If prices are flexible, does this shock lead to inflation or deflation? By how much?
Explanation / Answer
a.
Demand curve Qd = 7000-30P and supply is given by Qs= 1000
Market will at equilibrium where demand is equal to supply.
7000-30P=1000
P=200
Qs=Qd=1000
b.
Changes in consumer expectation about their future income changes their preferences for product, therefore demand curve will shift.
Qd’=6500-30P
And price is P=200, Qd’=500
And supply Qs=1000
Since supply is more than demand, there is market surplus.
Surplus= Qs’-Qd’=500
c.
When price is flexible, so market will at equilibrium where demand is equal to supply.
6500-30P=1000
550/3=P=183.33
Due to shift in demand curve the price of product decreases. Therefore demand shocks lead to deflation in the economy.
Deflation=(P2-P1)*100/P1=(200-183.33)*100/200=8.33%